Evavi Supply Chain Synchronization

Experimentation with customers and partners

Michael Chui, Pär Edin, and James Manyika of McKinsey have posted a new article making the case that "In the 'new normal' successful CIOs will search for value through experimentation with customers and partners."

The restructuring of the economic order now taking place is called by some the "new normal." According to the authors, key characteristics include: "persistent uncertainty, tighter credit, lower consumer spending, and greater government involvement in business."

In this environment, executives running large IT organizations will have to "make the IT function dramatically more productive, use IT more effectively to meet larger company goals, and embrace disruptive technologies that will shape the new economic terrain."

"First and foremost, CIOs will have to overcome hurdles that have limited IT’s performance in recent years:

• They must promote a much closer alignment between IT and the business units by embracing new organizational models that call for joint decision making. IT leaders will need better business skills, not just technical know-how.
• IT productivity efforts must leap beyond cost cutting at the margins. CIOs will have to make fundamental changes in the way IT operates and campaign for technological improvements that will transform cost structures and operating models throughout the enterprise.
• IT leaders must join with their business counterparts to seek out and implement technology-based innovations that will give companies long-term competitive advantages in a tougher economic climate.

In the past, IT performed satisfactorily if it made marginal progress in these areas. In the new normal, it must truly excel in all of them—the performance bar is higher, and the expectation that IT should contribute to corporate success is more insistent."

As CIOs adapt to the "new normal", my partners and I believe that supply chain synchronization will continue to gain in strategic importance. Supply chain synchronization goes beyond traditional supply chain management to break down data and process barriers between and across organizations. As this is accomplished, data flows in real time to those who need it and is presented in actionable formats. A key result is that organizations and their trading networks reduce costs while increasing customer service levels.

The transformation of a supply chain -- including both business processes and enabling technologies -- opens doors to support new business models and innovative services that were previously locked behind rigid and disconnected data and processes. When a supply chain has been synchronized, it often creates the best information available in a trading hub and has processes that can rapidly adapt to meet new requirements. As the McKinsey authors point out, disruptive technologies (often from smaller, innovative software firms) can help organizations experiment with customers and partners to achieve these types of results.

Cutting IT costs and complexity by aligning enterprise-wide requirements

CIOs are in a difficult position. As a recent article by Janaki Akella, Helge Buckow, and Stéphane Rey points out, "IT represents an important part of total spending—5 percent or more in some industries—and its direct contribution to revenues and profits is often difficult to assess."

The authors recommend IT leaders find significant additional reductions and efficiencies by "taking a broader look at the way they manage the IT architecture as a whole. The key to these economies is bringing business and IT leaders together in a combined effort to rationalize not only business applications and processes but also the core IT infrastructure and operations."

As anyone who has been intimately involved in IT understands, the reality is that short-term business wants and needs of individuals, divisions, and units are often addressed without full consideration to the larger requirements of the organization. While IT may design a long-term blueprint, the operational reality is that decisions often get made by divisions and business units with "relatively little regard for the impact on a company’s overall IT architecture" or the business processes than move beyond their division or unit.

The authors write: "CIOs at the corporate or division level generally do have substantial control over the core IT infrastructure components: servers, storage systems, and the associated infrastructure software. But the business applications, processes, and business model sitting atop the IT infrastructure often reflect the wants of the leaders of business units and functions, who understandably focus more on their own needs than on overall IT efficiency. Across a global company, the result is often an unwieldy, heterogeneous IT environment where incompatible (and often duplicative) hardware, applications, and processes sprout year by year, in every corner of the organization, in response to specific near-term needs....

"These patchwork systems require substantially more time and money for development, support, and maintenance—at the expense of budgets, new IT capabilities, and business innovation. At large companies, eliminating these duplications and inefficiencies can reduce IT spending by tens or hundreds of millions of dollars while improving the quality of the IT operation and the satisfaction of those who rely on it. The CIO alone, however, cannot reduce these costs; business leaders too must sponsor and participate in the transformation."

In their discussion about reducing costs and complextity, the authors mention two areas that my partners and I have also found to be of particular importance. The first is the need to develop an integrated data model (in our case, we have a common data model since our entire Supply Chain Synchronization suite is built on one data model rather than several that have been disconnected and then, later, integrated -- there are many benefits to the common data model approach). "[N]onintegrated databases greatly raise costs and result in inefficient processes, duplicative development efforts, longer times to market, business errors, and missed opportunities."

The other area of particular importance is the need to reduce interface complexity. "An IT staff can spend as much as 30 percent of its development time on applications making all of their interfaces work, largely because customized applications have so many point-to-point interfaces. Standardized interfaces, such as the enterprise service bus (ESB), can greatly ease the burden of system integration and minimize the chore of dealing with local changes." (Again, in our case we've developed our solution using SOA architecture and web services to the highest levels of cost savings while maintaining the flexibility to handle rapid change in the supply chain.)

When we talk with consultants and clients, they are often focused on the issue of customizations. My partners and I share the view articulated by Akella, Buckow, and Rey. They recommend that the focus on software customization should be in those areas that provide meaningful competitive advantage. They point out that rarely do functions like HR, finance, and accounting provide a competitive advantage in direct competition with other companies. Functions such as sales, product development, and supply chain are much better candidates for tailoring solutions that will create differentiation in the market. It should be noted that while it is very costly and time-consuming to customize most legacy ERP applications, some newer software in the supply chain and sales domains are specifically designed to overcome this limitation. Software such as our Evavi Supply Chain Synchronization Suite is designed for rapid tailoring and configuration, and enables companies to achieve market differentiation in the areas that matter.

Emerging technologies support new ways of gathering, managing, processing, and sharing information. In order to obtain the greatest benefits across the enterprise, legacy IT barriers must be removed and replaced with technologies that share common data models, provide easy data integration, and seamlessly enable planning and execution across business processes.  With an architecture in place that supports these capabilities, companies can then shape their future.

Increasing the energy efficiency of supply chains

Today, the transportation of goods consumes 15 million barrels of oil a day—roughly one-fifth of total production. Wow.

This staggering amount reflects the fact that supply chains of many manufacturing sectors went global when oil was cheap. In 2008, when oil hit $150/barrel, this variable in the supply chain equation proved that a supply chain model predicated on cheap oil is no longer viable. It also exposed the opportunities to increase margins and reduce risk by decoupling a supply chain as much as possible from energy.

Tobias A. Meyer, an associate principal in McKinsey’s Frankfurt office, has published a fascinating interactive to illustrate the challenges and show the opportunities to reduce energy costs in supply chains. Meyer has made an important contribution to McKinsey's ongoing study of efficiency in supply chains. McKinsey has "looked at numerous opportunities to reduce the amount of oil used to get goods from a manufacturer’s dock to a retailer’s shelf. These opportunities are available not only to manufacturers but to wholesalers, distributors, carriers, and third-party businesses. [They’ve] grouped these opportunities into six levers to illustrate possible next steps. Of course, the players in a chain operate independently from one another, so achieving all of these gains would require coordinated efforts and investments—a considerable challenge."

The six levers (divided into two groups) are:

        Supply chain set up

1. Increase value density
2. Reduce average transportation distance
3. Change the mix of transportation modes
   
   Transport assets
   
   
4. Address asset technology (e.g. rail, tanker, trucking)
5. Assess usage of individual assets
6. Assess usage of collective assets

Improving energy efficiency has become a top concern for executives, Tobias Meyer's interactive is a helpful tool to begin exploring levers for potential energy-efficiency gains in each stage of the supply chain. The ability to obtain the maximum gains will be contingent on the supply chain participants coordinating activities and sharing better information. The technology tools necessary to do this have been emerging over the past 5 years, and are becoming mature enough to help make a significant difference.

New technologies and technology adoption is setting the stage for novel business models

Jacques Bughin, Angela Hung Byers, and Michael Chui of McKinsey have recently posted an article reminding us that "The history of recession is also the story of technology advances that overturned the existing competitive order."

While we have all been working through the worst recession in 60 years, it is during this time that the seeds are being sown that will create new winners in the "new normal" economy. Bughin, Byers, and Chui write: "Though companies are tempted during a downturn to manage for survival, recessions in fact reveal periods when the competitive pecking order changes dramatically. Research by our colleagues shows that nearly 40 percent of leading US industrial companies tumbled from the top quartile of their sectors during the 2000–01 recession....In the here and now, new technologies and technology adoption is setting the stage for novel business models that portend disruptions as great as those of past downturns."

For those working in the supply chain space, the recession has naturally brought renewed focus on reducing inventory, eliminating obsolescence, and increasing inventory turns. Those companies that are also reevaluating their supply chains to enable new business models and create new areas of value will be strongly positioned to disrupt their industries. The challenge, of course, is to focus on cost reduction while simultaneously making strategic investments that will generate revenue from new services and offerings.

Clarity Is Missing Link in Supply Chain

In the Wall Street Journal today, Prhed Dvorak writes an interesting piece highlighting the importance of clarify -- or visibility -- in the supply chain. He illustrates how the sudden changes in the market last fall created huge disruptions and discrepancies throughout global global supply chains.

Due to the increasing complexity of supply chains, demand visibility for most participants is many steps removed from the final product. This has lead to a disconnect, or mising link, in the supply chain that exposes these participants in new ways. Particularly in times of turmoil, the just-in-time supply chains that span the globe must react very quickly, but without true visibility to demand variation. 

The following diagram from Dvorak's article helps one to visualize why it is so difficult for each participant in a supply chain to gain accurate demand visibility: 

Dvorak's article nicely illustrates this phenomon and the importance of connecting the supply chain data stream from end to end for better clarity.

Here is an excerpt of Dvorak's article:

"For a man who sells the chip "brains" that power millions of TVs, cameras and other gadgets, Levy Gerzberg found himself surprisingly unplugged last fall. In just a few short weeks, business virtually stopped.

He still marvels at the speed of the collapse. "I think about it today, and ask, 'Why did it happen so fast?' " says Mr. Gerzberg, CEO of chip designer Zoran Corp.

The reason is now starting to become clear. The world's complex "just in time" manufacturing supply chains are making it increasingly tough for Zoran, and any other single link in the chain, to know what's going on just a few links away. Sometimes, Zoran itself doesn't even know how its own chips are used: One batch it thought was destined for DVD players instead turned up in digital picture frames.

The recession has exposed a harsh side effect of the supply-chain system. Because modern industry rewards suppliers with the leanest inventories and fastest reaction times, when economic crisis struck, tech companies up and down the line contracted as sharply as possible in hopes of being the ones to survive....

Forced to guess at demand for their products in a plummeting market, everyone hit the brakes, hard. An examination of the electronics supply chain -- from retailers all the way back to makers of factory machinery -- shows that, at almost every stage, companies were flying blind as they cut...

The cumulative result: The tech pullback may have been overdone. In March, Best Buy Co. said it could have sold more electronics equipment in the three months ended Feb. 28, but its suppliers' deep cuts made it tough to keep shelves stocked. Suppliers "all decided to build a lot less," says Best Buy merchandizing chief Michael Vitelli.

As the contraction raced down the supply chain, its effects became amplified. Rick Tsai, CEO of chip manufacturer Taiwan Semiconductor Manufacturing Co., has said that, in last year's final quarter, consumer purchases of electronics gear in the U.S. fell 8% from the prior year. But product shipments fell 10%, and shipments of the chips that go into the gear dropped 20%.

The speed of the cuts are a big change from previous economic slumps. As recently as the early 2000s, companies compiled orders only monthly or quarterly; now they often do it every week. Their quicker reflexes this time kept their inventories from swelling dangerously, as happened last time, supply-chain experts say....

Complexities in the global supply chain make it tough to divine broad market trends, says Randy Bane, an economist for Applied Materials Inc., which makes factory equipment used to build chips like Zoran's....

Just a decade ago, the supply chain had far fewer links, Mr. Bane says. Chip sales were driven largely by personal computers, and just a handful of companies were bellwethers for the industry. Today, everything has a chip in it, dramatically multiplying the complexity. Behavior is "much more difficult to predict," he says.

At one end of the information flow are retailers such as Best Buy. For the U.S. market, it sends orders to its suppliers once a week, along with private forecasts for the coming 52 weeks, based on sales at its 1,000 U.S. stores and broader economic data. Manufacturers scrutinize reports like these to decide what parts they need to order.

The system is geared to respond quickly to changes in consumer behavior. But that puts risk on suppliers' shoulders....

"Usually the guy at the rearmost end suffers the most," says Morris Chang, TSMC's chairman....

The complete article can be read at the Wall Street Journal.

Supply chain is at the heart of the business logic of sustainability

Ray Anderson is one of my heroes.

As a young entrepreneur he founded the carpet company Interface in 1973. In 1994 he read Paul Hawken's book The Ecology of Commerce, and set out to fundamentally transform his business. He took to heart Hawken's message that business and industry must lead the transformation to sustainability. He realized that "with his company's global reach and manufacturing footprint, he was in a position to do something very real, very important, in building a sustainable world."

In the time since, he fundamentally changed his company's supply chain and business processes. He "focused the company's attention on sustainable decisionmaking, taking a hard look at suppliers, manufacturing processes, and the beginning-to-end life cycle of all its products. (For example: If you can't find a place to recycle a worn or damaged Flor tile, Interface invites you to send it back to them and they'll do it for you.) They call this drive Mission Zero: 'our promise to eliminate any negative impact our company may have on the environment by the year 2020.'"

Anderson spoke recently at a TED conference where he shared his inspiring story of fundamental transformation. This transformation not only has resulted in an ecologically-friendly company, but has also increased market share, profitability, and shareholder value. In this 15-minute talk, Anderson explains the business logic of sustainability. It is a message worth sharing again and again to those interested in understanding how sustainability is good business.

How CIOs should think about business value

CIOs are under increasing scrutiny to demonstrate the value that IT can deliver to the enterprise. Those CIOs who are able to successfully use IT to transform siloed business processes into new value-creating business processes that transcend hardened silos will be rewarded with influence on the enterprise far beyond the role traditionally reserved for IT.

There are many lenses through which value can be interpreted. In "How CIOs should think about business value" two consultants at McKinsey have provided a nice framework for thinking about this issue.

"If there’s any issue that routinely frustrates executives in many organizations, it’s how to get a true fix on the value that information technology adds to the businesses it serves. IT is undoubtedly central to creating value and therefore continues to account for a rising share of total investment. But defining, measuring, and maximizing that value remain elusive. To throw light on this crucial issue, McKinsey collaborated with CIGREF* to study the best practices of major French and international companies across various sectors."

Later in the article the authors provide important insight about change management and how HR is a necessary ally to ensure success. This is an area that is often overlooked when deploying sophisticated enterprise solutions that necessitate changed user behavior:

"If the corporate goal [of IT] is operational excellence, HR is more likely to be the CIO’s preferred ally. This is due to the critical role of change management. Take the example of deploying a new enterprise-resource-planning (ERP) system: the critical challenge is ensuring that the target processes are codified correctly in the system, and that when it is implemented, the end users are sufficiently trained to effectively leverage the potential of the new tool. This requires a joint effort from HR and IT to synchronize and coordinate their tasks from the initial design to the rollout and subsequent life of the system."

If this is not managed carefully, an IT project may be considered a failure with the blame being placed on the IT department and the software when the real problem may instead rest with the inability of the enterprise to effectively implement a change management strategy.

The following six points (and their accompanying Exhibits) provide additional insights about how CIOs can effectively engage with the enterprise to facilitate deeply meaningful success:

IT generates value at two complementary levels: the core asset value (eg, hardware and software) and the vitally important value-in-use (Exhibit 2).

In the context of optimizing investments, the value of IT derives from dynamic control over the impact of IT investments on each company’s operating ratios (Exhibit 2).

For CIOs focused on operational improvements, IT’s value is measured mainly by process performance indicators: productivity, on-time delivery, and quality (Exhibit 3).

Developing value-in-use requires a CIO to examine new levers found at points where the IT department and the business units intersect (Exhibit 4).

The CIO builds alliances with peers in areas relevant to supporting the company’s priorities (Exhibit 5).

The best companies at creating value-in-use embed their IT governance within the broader governance practices (Exhibit 6).

Be sure to also read the section "Next steps: Identifying the challenges" for a helpful framework explaining the dynamics of value creation through IT.

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*CIGREF, the “Club Informatique des Grandes Entreprises Françaises,” founded in 1970, strives to “promote the use of information systems as a driver of value creation and a source of innovation.” It includes more than a hundred public and private organizations from every economic sector in France.

About the McKinsey authors: Michael Bloch and Andres Hoyos-Gomex are principals in McKinsey’s Paris office.

Cultural adaptation of crows

Every once in a while you come across something that just captivates you. Such was the case when I recently saw a TEDtalk by hacker and writer Joshua Klein. Klein, as you will see, is fascinated by crows. He has engaged in a ten-year amateur study of their behavior. One of his findings is that crows live in all parts of the planet (except Antarctica and the southern tip of South America), and that they always breed less than 5 km from human populations. They are hyper-adaptive and thrive by their proximity to humans. Klein illustrates their cultural adaptation by talking about how some crows in Japan developed an ingenious way of getting to food with the help of the automobile. Now, ten years after the first crows did this, all of the crows in this area of Japan have picked up this behavior. The crow's ability to quickly and flexibly adapt to new environments is astonishing. You'll also enjoy the vending machine he created for these wily birds. Enjoy this 10-minute talk.

Building a flexible supply chain for uncertain times

McKinsey has recently posted an article illustrating how the "bullwhip effect" is particularly relevant to the current economic climate and provides ideas on how to address the situation. Included are examples of how distortions in supply chain data propagate through the supply chain creating even larger distortions at every node in the network. Companies with the highest degree of flexibility -- obtained by the ability to rapidly make good decisions with good data, and then executing and iterating just as rapidly -- will be those that not only protect themselves, but ultimately use this as an opportunity to improves their supply chains.

Here are a few excerpts from "Building a flexible supply chain for uncertain times".

"The global downturn’s speed and severity have significant implications for the supply chains of global manufacturers.... the forecasting challenge is particularly acute because in many upstream industrial settings, as supply partners along the chain anticipate that demand will fall, the supply chain appears to be decoupling from downstream consumption—the focus of most forecasting models....

How should manufacturers respond? First, they must make supply chain decisions more quickly: in the face of unprecedented volatile demand, business-as-usual calendars for forecasting, budgeting, and planning won’t do. Companies that adhere rigidly to unrealistic plans may find themselves sitting on piles of inventory or fighting price wars.

Some companies are establishing supply chain “war rooms” to make fast decisions across functions. Populated by leaders from production, procurement, logistics, and sales—and furnished with the latest data on purchasing, production, orders, and deliveries—these teams meet weekly or even daily to devise near-term operational plans....

As companies rethink the way they plan, they must also learn how to act on the resulting decisions more quickly and flexibly....

Smaller but more frequent orders are often an easy way to reduce volatility in demand and therefore inventory levels....

Manufacturers should view today’s environment as an opportunity. Now they can make changes—renegotiating contracts, consolidating manufacturing and distribution networks, launching aggressive productivity programs—that might not have been feasible earlier and may soon be difficult again."

About the McKinsey authors: Christoph Glatzel is a principal in McKinsey’s Cologne office, Stefan Helmcke is a principal in the Vienna office, and Joshua Wine is an associate principal in the Tel Aviv office.

Smart IT investments to manage inventory and manage logistics to generate revenue gains

Effectively managing inventory and managing logistics through smart IT investments are two of the areas that McKinsey identifies as generating "short- and medium-term revenue and efficiency gains that greatly exceed the savings from traditional cost-cutting efforts. The key is to have business and IT executives jointly take an end-to-end look at business processes and scan for opportunities such as improving the customer experience, reducing revenue leakage, and improving operating leverage.

The exhibit below illustrates the two fundamental ways for technology investments to have a substantial impact: developing new insights (for example, by comparing best practices across regions) or optimizing processes and systems, often with targeted work-arounds that generate value disproportionately."

 

McKinsey's February 2009 Chart Focus Newsletter.